Public confidence in private infrastructure investment has been lost, so we need a finance model we can believe in, says Michael Urquhart
The UK government has ambitious infrastructure plans, with a forecast of £600 billion of investment over the next decade. But, does it have the budget to meet such plans? It appears unlikely that the government will radically increase its capital spending to fund all of these plans, therefore a combination of public and private infrastructure investment will be essential in realising its ambitions.
But public confidence in private infrastructure investment has been lost. “Poor value for money”, “sham” and “rip-off” are all terms used to describe the use of public private partnerships (PPPs). UK Government has abolished the use of existing PPP models (PFI and PF2) for future projects. High-profile collapses to sector participants, such as Carillion, have amplified distrust in PPPs.
With the relationship breaking and no suitable alternative model being promoted, it’s imperative that the government and the private sector collaborate to create an evolved, rebalanced PPP model that works for both the infrastructure industry and the tax payer.
So what are PPPs? They are contractual arrangements between the public and private sectors, where the public sector has the need - but not necessarily the capital budget - for an infrastructure asset. To meet this need, the public authority will procure a private sector company to design, build, finance and operate the infrastructure asset being sought.
This method of financing has been a key driver for public authorities over the last 25 years, enabling them to procure vital infrastructure “off” the public sector balance sheet. In doing so, it aimed to transfer the risk from the public to the private sector, benefit from industry expertise and drive efficiencies. If the private sector failed to meet the required outputs on time, on budget and on specification, it suffered financial penalties.
So what went wrong? Essentially, the overall costs of historic PPP programmes didn’t reflect a position perceived to be a fair deal for the public authorities. Public sector costs were disproportionately high in comparison to the risk transferred to the private sector.
Views became entrenched, predominantly: the private sector is bad; the public sector is good. In reality, the position is not so binary. PPP is not the “fraud on the people” that many perceive it to be. The majority of private finance projects are built to the agreed timetable, price and specification. On the few occasions when this hasn’t occurred - the construction of the Edinburgh schools projects being a recent example - the private contractors have generally taken the financial hit. However, if the private sector manages the project efficiently and makes an additional profit as a result, it can be difficult to accept, particularly in relation to more emotive infrastructure projects such as schools or hospitals.
Where do we go from here? The Treasury recently reported: “If capital and cash budgets are insufficient, private finance may be the only investment option for public bodies”. These budgets are increasingly strained, and with looming uncertainties and risks associated with Brexit, it’s critical that a finance model is found that allows essential capital projects to be funded in a manner that the public can accept as fair to all.
Do the devolved administrations hold the answers? Infrastructure spending is a devolved power in Scotland and Wales and both administrations have taken steps to address the concerns attached to PPPs.
The Welsh Government has developed a procurement model (the Mutual Investment Model) that aims to build on “lessons learned” from previous structures. Features include public sector minority shareholdings in the project and enhanced public sector governance, all with the fundamental aim of ensuring value for money and public benefit. Private sector returns are not capped, but returns will be shared with the public sector as a shareholder. It is a model the Scottish government is examining for delivery of their planned infrastructure investment over the next decade.
It is clear that PPP is not a panacea to the problems of public service funding. For all that it is maligned, however, it provides an opportunity to deliver much needed improvement to public infrastructure and, when managed effectively, can work well for all parties. With its focus on value for money, profit sharing and delivery of community benefits, there’s hope that the Mutual Investment Model can lead us down the path towards public private reconciliation, and ultimately the completion of projects necessary for the growth of the economy and the benefit of public Scotland and the wider UK.
Michael Urquhart is a Legal Director with DLA Piper